Wall Street analysts say buy Facebook dip because newsfeed change lowers regulation risk

Key Points
  • Analysts believe Facebook's financial results will not be materially impacted by the newsfeed change.
  • Needham's Laura Martin predicts Facebook will be able to raise its ad pricing to negate any impact from users spending less time on the platform.
Chris Ratcliffe | Bloomberg | Getty Images

Facebook's pivot away from news will pay off in the long run, according to Wall Street analysts.

The company announced on Thursday a major change to its newsfeed. CEO Mark Zuckerberg said the internet giant will start prioritizing "meaningful social interactions" versus "relevant content," and that he expects the time people spend on the social network will go down as a result.

Facebook shares dropped 4.5 percent Friday following the news.

But on Tuesday, they were up nearly 1 percent after Needham reaffirmed its buy rating for the social media giant, predicting strong financial results this year.

"We are positive about these changes because we believe they will be economically neutral and they lower the risk that FB gets regulated," analyst Laura Martin wrote in a note to clients. "By pivoting away from publishers (ie, news), FB immediately lowers its perceived power to spread 'fake news,' which lowers the risk of government intervention. We expect FB's ad price to rise as time spent and/or ad units fall."

Martin reiterated her $215 price target for Facebook shares, representing 20 percent upside to Friday's close.

The analyst downplayed Zuckerberg's warning that the changes may lead to less user time spent on the internet service. She said the company has made repeated warnings in the past 18 months over growth.

"Selling FB's shares on this worry proved to be a mistake in 2017," she wrote. "What FB's financial performance has demonstrated so far is that as FB's ad inventory shrinks, its prices at auction become more robust, nearly frenetic."

GBH Insights' Daniel Ives is also confident Facebook will be able to raise its pricing after the changes.

"We see minimal negative financial implications from this move for Zuckerberg & Co in 2018. … Limited ad inventory will ultimately help drive up pricing power and more than offset decreased ad load," he wrote in a note Monday. "We continue to believe this was the right strategic move at the right time for Facebook."

Ives reaffirmed his "highly attractive" rating and $225 price target for Facebook shares.